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India preparing a revolution in the arms market

(RIA Novosti correspondent in India Yevgeny Bezeka) - All participants in DEFEXPO-2008, which opens in New Delhi on February 16, are bound to see the beginnings of a revolution in the Indian military-industrial complex.

This revolution is certain to acquire global dimensions, because India is in the top ten in arms spending - in 2007-2012 it will buy $30 billion worth of weapons.

The revolution is rooted in India's reluctance to depend on foreign weapons. It wants not only to be militarily sufficient but to become a world center for the production and exports of arms spare parts.

Indian private companies, which have not been prominent in the defense industry, will play a key role in pursuing this goal. Only recently, they did not get any government defense orders, but now they will be encouraged to make friends with foreign partners in order to carry them out.

The new line is reflected in DEFEXPO's official goal - to become a site where foreign producers can make contacts with Indian industrialists with a view to setting up joint ventures.

Indian private companies have become much stronger in the last 17 years since the Indian market was opened to foreigners. They are irritated that a lion's share of government orders is awarded to foreigners and state-run companies.

The Indian defense industry does not always fulfil its goals, and the government has promised to give a bigger share of multi-billion defense orders to domestic private companies. Their advent to the strategic defense industry, which accounts for about 2.5% of GDP, should resolve two tasks - encourage competition with state-owned companies and increase its adoption capacity - new orders of foreign weapons will bring in huge investment.

The Indian government's requirement is that foreign companies invest at least 30% of the contract's value in the local defense industry. This applies to all deals worth more than 3 billion rupees (about $770 million). This figure has been raised to 50% on the eve of a mega tender for the supply of the Indian Air Force with 126 fighters to the tune of more than $10 billion.

One third of $30 billion is $10 billion. This is the amount of investment that India will have to assimilate in the next few years. Indian Defense Ministry officials admit that state-owned companies will not be able to swallow that much.

For the time being, private companies are kept at a certain distance - they have no chance of receiving a defense order if the share of foreign capital exceeds 26%. Moreover, unlike state-owned companies, they have to pay 30% import duties for foreign spare parts.

But this situation may soon change. First, analysts expect an increase in the 26% limit on foreign capital. In other words, investors, or arms suppliers, will set up in India a joint venture that will carry out the orders they have received - but on the spot rather than abroad.

Second, the government is about to complete a list of private firms that will get equal rights with state companies. It is rumored that the list will include such industrial giants as Larsen & Toubro, and companies belonging to Godrej, Tata, and Mahindra & Mahindra.

However, Secretary for Defense Production Shri Pradeep Kumar admitted last week that approval of this list was being delayed because of resistance on behalf of some state companies.

But the government has already promised help to foreign firms that are rushing around with bags of money in search of local partners. There is no doubt that they will implement the new requirements and receive licenses.

Some private companies have been working for the defense industry. Larsen & Tourbo, for example, is building a secret nuclear-powered submarine for India, and is prepared to assemble aircraft under license, that is to do what the state-owned Hindustan Aeronautics Limited (HAL) is now doing.

Larsen & Toubro and Strategic Electronics Division from the Tata Power Corporation are carrying out a Defense Ministry order for the production multiple launch rocket systems. The tractor building company Mahindra & Mahindra has built an armored cross-country vehicle in just two years.

The Defense Research & Development Organization (DRDO) is going to acquire a new role of a scientific center. It will also be the main distributor of orders to private companies.

To sum up, the companies that want to sell arms to India should take its new requirements into account. The forthcoming revolutionary changes will call for a new approach and more flexibility. Indian partners in the arms market need to learn how to come to terms with the local players, develop production lines, find the best ways of implementing offset commitments, and respect the higher ambitions of their Indian partners.

Russia, which has an impressive display at the shows, enjoys obvious advantages in this respect because India has been testing its new policy primarily in cooperation with Moscow. But this alone does not guarantee Russia's victories at all tenders for defense orders.

The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

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